Need to Know!

Rental References – More Important Than Ever!

April 2, 2013 9:50 pm

Tenant screening as we know it today is a relatively new practice fueled by strides in the quality and availability of consumer credit and public records information.  Comprehensive tenant background checks quickly followed – adding rental references, employment verification, and recommendations.

About 10 years ago the market began to embrace the so-called “quick” model – computer generated background checks based on the premise that scored credit combined with an instant public records search is sufficiently predictive to obviate the need for the more thorough (and accurate) but time-consuming comprehensive tenant screening product.  Some abandoned the use of rental references altogether.

But the landscape is changing yet again, driven largely by the emergence of the “disparate impact legal theory.” Under this theory (for which there is substantial and growing precedent), “facially neutral” business practices have been shown (statistically) to disproportionately impact protected groups on the basis of discrimination claims.  One example of such a practice is the use of arrest records (versus convictions) to deny tenancy (or employment).  It is well established that doing so has a disparate impact on some (protected) groups.

Disparate impact discrimination claims are difficult to defend.  Once a practice is shown to have a disparate impact on a protected group, the burden shifts to the defendant (landlord or employer) to prove “business necessity” – defined as a legitimate business purpose that justifies an employment background check or tenant screening practice as valid and necessary for the effective achievement of the organization’s objectives and the safe and efficient operation of the business.  Add to that the collective view that we are innocent until proven guilty and use of an arrest record alone to deny tenancy or employment is a risky practice and simply not done by human resource and property management professionals.

There has been relatively little (disparate impact) activity around the use of credit for tenant screening purposes – suggesting that it (the credit data) meets the business necessity test.  There is and has been, however, a great deal of legislative activity (at the state and local level) directed at limiting the use of public records data (criminal & eviction) for tenant screening purposes – fueled in part by the disparate impact argument.

California’s Consumer Credit Reporting Agencies Act, for example, prohibits reporting of “Unlawful detainer actions, unless the lessor is the prevailing party.  The Act further states the lessor shall be deemed to be the prevailing party only if (A) final judgment was awarded to the lessor (i) upon entry of the tenant’s default, (ii) upon the granting of the lessor’s motion for summary judgment, or (iii) following trial, or (B) the action was resolved by a written settlement agreement between the parties that states that the unlawful detainer action may be reported”.  Note that the majority of unlawful detainer actions are dropped prior to issuance of a judgment – not because the filing is without merit, but because the tenant either paid or moved out, and because pursuing a judgment is expensive and of the odds of recovery are low.

In 2010, California Senate Bill 1149 amended section 1161.2 of the Code of Civil Procedures to further prohibit access to unlawful detainer records until 60 days after the complaint was filed.  This is truly unfortunate since the eviction we (as landlords) are most concerned about is the one that just occurred – the reason the applicant is looking for a new rental or apartment home.

California may be leading the charge in this area, but they are not alone.  Similar restrictions are being considered in other states.  So while eviction searches remain worthwhile, there is little doubt that the value will diminish going forward – which bring me to my point!

Rental verifications may be old fashioned, but they are quickly becoming more important than ever!  

Done well… rental verifications are often the best predictor of future lease performance.  If an applicant has a history of paying rent on time, complying with rules and regulations, giving proper notice and leaving their unit in good condition – they will (in all likelihood and notwithstanding their current credit standing) do so again.  If on the other hand, the applicant has multiple late payments and noise complaints – if they failed to give proper notice and trashed the place – they are a dubious risk, regardless of their income, credit standing and public records history.

Done well are the operative words.  Done well means asking the right questions in the right way – questions which elicit only objectives responses – such as:

  1. Number of late payments and NSF checks?
  2. Number of documented noise complaints?
  3. Number and types of notices served?
  4. Has proper notice been given?
  5. Has the resident been asked to vacate?  If so, why?
  6. Any damage to the unit?
  7. Is (or was) there a balance owing to the landlord?
  8. Has the lease term been fulfilled?

Done well means using the necessary resources to confirm that you are speaking to the landlord – versus a “plant.” Done well means doing the research needed to determine whether additional addresses on the credit report are rental housing and, if so, contacting those landlords as well.

Note that there is for some, an exaggerated fear of being sued for defamation.  But if we are truthful… if we limit our questions (and responses) to those outlined above…  the risk is relatively small.

Ultimately, there is little doubt that verifications will play an increasingly important role as we compensate for growing restrictions on access to (and use of) the public record.  So whether you do them yourselves or you outsource them to others – just do them!

Visit Moco Inc and MyScreeningReport.com for access to a wide range of information and resources for property managers and landlords.

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